International Sustainability Standards Board launched

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It’s fair to say there are differing opinions on whether the 2021 United Nations Climate Change Conference (COP26) adequately addressed the pressing issues facing our planet. But there was at least one significant announcement that will have a far-reaching impact on how companies do business for years to come.

The Glasgow showpiece saw world leaders stand shoulder-to-shoulder with some of the biggest names in industry. The International Financial Reporting Standards Foundation (IFRS) used this stage to launch its International Sustainability Standards Board (ISSB). IFRS oversees accounting standards in more than 140 nations, and the ISSB initiative will develop high-quality standards for sustainability disclosure in accountancy.

Having already appointed former Danone CEO Emmanuel Faber as Chair, the board’s remit will be to deliver a comprehensive global baseline for sustainability-related standards which will enable investors to make informed decisions.

The ISSB will work closely with the International Accounting Standards Board (IASB) to ensure both sets of standards work seamlessly alongside each other.

The IFRS said the decision to create the ISSB was prompted by consultation feedback. This feedback, which included two public consultations, found international investors with global portfolios were increasingly calling for transparent and reliable reporting by companies on a range of matters relating to the climate, society, the environment, and governance.

Announcing the creation of this new international sustainability standards board at COP26, Erkki Liikanen, Chair of the IFRS Foundation Trustees, said: “Sustainability, and particularly climate change, is the defining issue of our time. To properly assess related opportunities and risks, investors require high-quality, transparent, and globally comparable sustainability disclosures that are compatible with the financial . Establishing the ISSB and building on the innovation and expertise of the CDSB, the Value Reporting Foundation and others will provide the foundations to achieve this goal.”

IFRS Sustainability Disclosure Standards

So what are the IFRS requirements? 

While we do not yet know exactly what the finalised standards look like, we do have enough information to make an early assessment of what they are likely to resemble.

The IFRS has said it aims to release a draft set of standards by the first quarter of 2022 and have a climate-related disclosures standard as well as a standard on general requirements for sustainability-related financial disclosures ready by the second half of the year.

The IFRS sustainability disclosure standards themselves will be based on the groundwork put in place by the Technical Readiness Working Group (TRWG) which was set up in March of 2021.

The establishment of the TRWG was partly a response to calls by the Organisation of Securities Commissions (IOSCO) for greater consistency in how sustainability factored into the decisions made by companies, information which could then inform decisions of investors for whom sustainability was a concern.

On 3 November 2021, to coincide with the announcement about the formation of the ISSB at COP26, the TRWG also published two prototypes.

These were:

  • The Climate Prototype. This sets out the requirements for the identification, measurement, and disclosure of specific climate-related financial information. This will vary depending on industry but includes information such as sourcing of materials used in manufacturing processes.  
  • The General Requirements Prototype. This requires an entity to disclose a complete, neutral, and accurate depiction of its significant sustainability risks and opportunities. It includes things such as the targets set by management to mitigate or adapt to sustainability-related risks as well as those that enhance stainability-related opportunities to achieve strategic goals.

The prototypes were developed following six months of joint work by representatives of the CDSB, the International Accounting Standards Board (IASB), the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), the VRF, and the World Economic Forum (Forum). It was also supported by the International Organization of Securities Commissions (IOSCO) and its Technical Expert Group of securities regulators.

With this additional backing, the TRWG consolidated key aspects into a combined set of recommendations for consideration by the ISSB.

Now up and running, the ISSB said it will consider the prototypes in its work program, with the climate-related disclosure looking likely to be the first one issued, with others then set to follow. This could include standards on broader sustainability.

Over the course of early 2022, exposure drafts will be issued and comments received, re-deliberation will then be followed by the issuing of final standards.  

In terms of adoption, it will be down to individual jurisdictions to decide whether they adopt the new standards, with some likely to do so early on.

The United Kingdom, for example, has already said it expects to put ISSB at the centre of its own sustainability reporting requirements. It remains unclear however, how they may be adopted in other jurisdictions such as the United States and European Union.

That being said, many jurisdictions and companies are already undertaking similar work. Firms which have, for example, adopted TCFD recommendations on climate-related financial disclosures will themselves be well placed to adopt the new standards once they are finalised and released in 2022.

To help further the adoption of the new standards, the Trustees have formed a working group to enable further formal engagement between the ISSB and jurisdictional representatives. This will also include those in emerging markets.

The intention is for the ISSB to be a truly global presence, and it said that engagement with developing and emerging economies will be ‘an important priority’.

The board and chair will be based in Frankfurt, while Montreal will be responsible for supporting the new board and for deeper co-operation with regional stakeholders. Work at both offices is due to begin in early 2022.

Offices in San Francisco and London will also provide technical support, help with market engagement and assist in creating further cooperation with regional stakeholders.

Further discussions will continue with proposals for offices from Beijing and Tokyo to finalise the board’s footprint in Asia and  Oceania.

Working with other regulatory bodies

As highlighted earlier, the ISSB will work in close cooperation with the IASB, which will see the International Financial Reporting Standards and the ISSB’s sustainability standards almost as two sides of the same coin. Both boards will be independent and overseen by the IFRS Foundation trustees.

The TRWG already represents several organisations which have experience in standard setting. The VRF and the CDSB will be consolidated into the ISSB and it will work closely alongside the IASB.

The IFRS Trustees announced the ISSB at COP26 and also revealed a commitment by leading investor-focused sustainability disclosure organisations to consolidate into the new board. By June 2022, the IFRS Foundation will also carry out the consolidation of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VR), which houses the Integrated Reporting Framework and the SASB Standards.  

The ISSB will also have access to expertise from advisory groups. Technical advice on sustainability will be provided by a new Sustainability Consultative Committee. Its members have been drawn from a range of organisations including the United Nations, International Monetary Fund, the Organisation for Economic Co-operation and Development, and the World Bank. There will also be other experts drawn from private, public, and non-governmental organisations.

The bigger picture

It is important to not simply take the new standards in isolation but to consider them in the broader context of society and business.

COP26 was just the latest example of how the public is demanding more not just of governments, but of business when it comes to the climate agenda. With this in mind, it is clear that sustainability reporting standards have a number of crucial benefits.

The most obvious one is the benefit to the environment. Standards provide clarity of guidance to firms who want to do their part in the fight against climate change. Until now, they have not had a baseline to compare their efforts to, and had fewer ways to clearly understand the impact that their actions were having.

Another benefit is to the business itself, the efficiency of how it operates, perception, and the bottom line.

In terms of perception. A company’s green credentials are a major factor in how it is viewed by the public and in turn by prospective clients who wish to be associated with it – or not, as the case may be. 

For example, a global report from The Economist Intelligence Unit, commissioned by WWF, revealed a 71% rise in online searches for sustainable goods globally over the past five years.

So it is becoming increasingly important for a company to be able to demonstrate – not just state – its green credentials. By being transparent, it becomes possible to quantify the commitment a company is making towards the sustainability agenda helping to build trust and loyalty.

Reporting standards can also help streamline business operations, provide risk-management benefits and lead to the necessary collation of more data which can then in turn be fed into the decision-making process.  

What’s next?

By any measure, things are moving very quickly. Having only formed TRWG in March last year and with the announcement of the ISSB in November, work is already well underway to turn prototypes into standards which will then go out over the course of early 2022. 

Following his recent appointment at the helm, Emmanuel Faber, said: “The ISSB represents a once-in-a-generation opportunity to fulfill that need in a fast-changing world, where the climate in particular will drive major shifts in the coming years. We should move diligently and build on the great momentum resulting from the formation of the ISSB at COP26.”

With the Chair now in place, nominations will be received for the remaining board members, with the ISSB planning to launch its first public consultation on its proposed reporting standards by the end of March 2022.  

How important is sustainability to your organisation and are you prepared for the new reporting standards? Get in touch with HLB for more information. 

 

Polyvios A Polyviou

Global IFRS Leader

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